Home values and mortgage rates are lower than ever, which makes buying a home look better than renting like never before. However, there are a lot of catches involved.
Census shows rent and mortgage payments at near parity
According to MSNBC, data from the most recent U.S. Census reveals that the average national mortgage payment and rent payments are close to reaching parity, as both were about $700 at the end of 2011.
Interest rates for mortgages are continuing to stay low. According to the Washington Post, the national average 15-year fixed-rate mortgage rate was 3.17 percent on Thursday, Jan. 18 and the 30-year fixed-rate mortgage rate was 3.88 percent.
In other words, owning a home is becoming cheaper, which resurrects the argument of whether it’s better to rent or to buy.
Catches still the same
On the face, it appears that home ownership is better, because instead of money going to a landlord, it’s purchasing an asset. However, there are a few hitches.
First, the mortgage rate. Numerous outlets report that mortgage rates are low, but those are misleading as not everyone qualifies for them. Credit rating is a factor in the rate a person is offered, and as MSNBC points out, many lenders are requiring a credit score of 700 these days. The rate each individual gets determines the economy of scale.
Second, the down payment. The average home price, according to Forbes, was $164,500 in December 2011. Assuming a 20 percent mortgage down payment is required, the average person will have to come up with $32,900 to purchase a home. Assuming a person has to pay first and last month’s rent as the security deposit on a rental, the average renter only has to come up with $1,400, assuming rent of $700.
Then there are closing costs, sales taxes and property taxes. Renters, according to MSNBC, would only have to worry about losing the deposit and perhaps a brokerage fee, if they go through a broker. Landlords raising the rent could be an issue, but not every landlord does. Renters are also not responsible for repair costs.
The possible upside
A possible upside to buying instead of renting is that when home owners leave, they sell the home. The home could sell for for more than the purchase price. However, that only pays off if the the sale price is also more than purchase price plus the cost of any improvements, realtor fees and sales taxes.
One must also account for inflation. Houses usually increase in nominal value, or the number of dollars they are worth. That said, monetary inflation, which has been constant, means that every year, there are more dollars in the economy and $1 buys a little less. If the price of a home only keeps pace with the rate of inflation, real appreciation hasn’t occurred, as the number of dollars the house commands buys the same amount of goods and services.